As is the case with all aspects of business and life in general, the COVID-19 pandemic had a major influence on the trends in insolvencies and restructurings in Croatia. As a relief measure for distressed businesses, during 2020 the Croatian Parliament enacted a specific piece of legislation which (with very few exceptions) essentially prohibited creditors from initiating bankruptcy proceedings over their debtors in the period from 1 May 2020 until 18 October 2020.
Naturally, the stated prohibition resulted in a significant year-on-year decrease in new insolvency cases initiated during 2020. According to Annual Reports on the State of the Croatian Judiciary (jointly: the “Reports”; individually: the “Report”), which are submitted every year by the President of the Supreme Court of the Republic of Croatia to the Croatian Parliament, in 2020 the commercial courts received approximately 4,780 new pre-bankruptcy and bankruptcy cases, significantly less than 7,175 new such cases received during 2019.
However, this decrease was obviously caused by a pause in new proceedings created by legislative intervention, and not by the resilience of Croatian companies to the challenges caused by the pandemic. Hence, the number of new bankruptcy and pre-bankruptcy cases quickly increased again, to 8,816 in 2021.
Even with the surge of new insolvency cases in 2021 in relation to what was recorded for 2020, the general statistics seems favourable – the Report for 2021 shows that the courts managed to achieve a clearing rate (calculated as the ratio of cases resolved and new cases received in a particular year) of 92%.
However, these statistics encompass a significant number of the relatively simple, open-and-shut cases where there are no assets available for distribution, as well as cases where only a small number of creditors are involved. In practice, more complicated cases which involve significant assets and a larger number of creditors, usually take several years to resolve.
The firm recently participated in the structuring and implementation of a bankruptcy plan related to a large Croatian producer of railway vehicles, involving an operational company with significant assets and many creditors, which did end with successful restructuring; however, the overall bankruptcy proceedings lasted for nine years. That case is by no means representative of the overall pace at which insolvency cases are resolved in Croatia, but it does reveal that some insolvency cases can, for various reasons, get stuck in a sort of limbo for long periods of time.
In any case, the firm’s general experience during the last couple of years is that the courts are becoming more efficient in their handling of insolvency procedures. However, efficiency of procedures is often determined not so much by the courts as by the sense of urgency and initiative on the part of the creditors and the bankruptcy administrators, whose willingness to invest time and resources in either expedient liquidation of assets or restructuring of the debtor’s business can make a big difference in any particular case.
The principal piece of legislation regulating insolvency and reorganisations in Croatia is the Bankruptcy Act (OG No 71/15, 104/17, 36/22, the “Bankruptcy Act”), which contains rules on bankruptcy and pre-bankruptcy proceedings.
The Act on the Extraordinary Administration in Companies of Systemic Importance for the Republic of Croatia (OG No 32/17, the “Extraordinary Administration Act”) is designed to regulate the restructuring of companies which are deemed to be of strategic importance. It applies only to companies or groups with more than 5,000 employees and approximately EUR1 billion of debt.
Liquidation is regulated by the Companies Act (OG No 111/93 – 34/22, the “Companies Act”). Supplemental legislation that also applies to some aspects of insolvency and restructuring consists of but is not limited to the Financial Operations and Pre-Bankruptcy Settlement Act (OG No 108/12 – 71/15), the Civil Procedure Act (OG No 53/91 – 80/22), the General Administrative Procedure Act (OG No 47/09, 110/21), the Enforcement Act (OG No 112/12 – 131/20), the Act on the Securement of Employees’ Claims (OG No 70/17), and the Civil Obligations Act (OG No 35/05 – 126/21).
Additional rules can be found in legislation which regulates entities from specific sectors, such as banks and insurance companies.
A voluntary reorganisation is achieved through pre-bankruptcy and extraordinary administration proceedings, while involuntary reorganisation can be achieved through bankruptcy proceedings.
Voluntary liquidation is commenced with the purpose of termination of the company and the distribution of all of its assets, after all the company’s liabilities towards the creditors have been settled. In Croatia liquidation is not a process that can be used for restructuring an insolvent company, because if insolvency is established, liquidation turns into bankruptcy.
Commencement of bankruptcy proceedings is mandatory within 21 days following the occurrence of either of the prescribed bankruptcy reasons. A bankruptcy reason is either insolvency or over-indebtedness. The law provides for elaborate criteria to check whether either of these reasons is deemed to have occurred.
Persons obliged to commence mandatory bankruptcy proceedings who fail to do so are personally liable to creditors for any damage caused by such omission.
Management board members and liquidators could also face criminal liability since failure to initiate bankruptcy is a felony, with prescribed penalties of a monetary fine or imprisonment for up to two years. However, the general perception is that these sanctions are rarely imposed in practice.
Creditors may initiate bankruptcy proceedings if they can prove that their claims are at least probable and that the prescribed bankruptcy reasons exist with respect to the debtor. A creditor who holds a proprietary security over the debtor’s asset but also holds a direct claim towards the debtor is entitled to initiate bankruptcy if it is probable that his claim may not be fully collected out of the security.
Also, the state-operated Financial Agency is obliged to submit a proposal to commence bankruptcy proceedings ex officio if its records show that a company has one or more registered outstanding payments over an uninterrupted period of 120 days.
Insolvency or over-indebtedness are prescribed as the reasons for the opening of bankruptcy proceedings.
Insolvency is defined as a permanent inability of fulfilment of monetary obligations. A debtor that has outstanding monetary obligations registered within the Financial Agency for more than 60 days is considered insolvent. Another criterion for considering a debtor insolvent is related to payment of salaries: failure to pay three consecutive salaries to its employees is considered evidence of insolvency.
The other reason for bankruptcy, over-indebtedness, occurs when a debtor’s overall obligations are greater than its assets.
Imminent insolvency of the debtor is required to commence (voluntary) pre-bankruptcy proceedings. Imminent insolvency exists if the applicant proves it is probable that the debtor will be unable to fulfil its outstanding monetary obligations upon their maturity. The debtor shall be considered imminently insolvent if it has unsettled monetary obligations registered within the registry of the Financial Agency, or if the debtor is in default of the obligation to pay salaries, employment-related contributions or taxes for more than 30 days.
Pre-bankruptcy proceedings cannot be initiated over a financial or credit institution, credit union, investment company, investment fund management company, insurance and reinsurance company, leasing company, institution for payments or institution for electronic money. This does not exclude commencement of bankruptcy proceedings for these entities.
The Extraordinary Administration Act, which was recently enacted to regulate voluntary restructuring of companies which have systemic importance for the Republic of Croatia, explicitly excludes credit institutions from the scope of its application.
There are specific procedural rules applicable to the bankruptcy of certain entities such as credit institutions and insurance companies.
Only the regulator can initiate bankruptcy (the process is called mandatory liquidation) over a credit institution, if certain sector-specific bankruptcy reasons occur. In relation to the generally prescribed repayment rankings, claims of the Croatian National Bank, claims based on eligible deposits up to prescribed amounts, and claims based on eligible deposits exceeding prescribed amounts are ranked higher in relation to other types of claims.
If bankruptcy is opened over an insurance company, the court is obliged to inform the regulator no later than immediately upon opening of bankruptcy. Aside from the bankruptcy administrator, the court also appoints a special administrator obliged to provide support to particular categories of insured persons, which includes applying their claims within the procedure. In relation to the generally prescribed repayment rankings, certain claims arising in relation to insurance contracts, as well as claims for reimbursement of payments out of a special Guarantee Fund, which is set up by law, enjoy priority in relation to other types of claims.
Croatian law does not require preliminary mandatory and/or consensual restructuring negotiations as a prerequisite for commencement of a formal statutory process and does not provide a specific legal framework for out-of-court restructuring proceedings.
Croatian legal practice is more focused on statutory debt collection and/or restructuring, as initiation of bankruptcy becomes mandatory once the prescribed bankruptcy reasons are satisfied.
Since out-of-court restructuring is not often seen in practice, no specific timeline can be identified for such a process. However, this does not mean such consensual restructuring negotiations are not allowed provided this does not violate any other applicable legislation (eg dissemination of price-sensitive information for publicly listed companies, completing any out-of-court restructuring scheme before bankruptcy reasons kick in).
New money is not protected by law if granted outside statutory procedures and contractual security may fall under additional scrutiny if restructuring fails, and this may be one of the important reasons why the practice of out-of-court restructuring is not very developed.
In the event of consensual out-of-court restructurings, the parties have to comply with general principles of corporate and insolvency law. Once financial difficulties occur, creditors tend to be additionally careful in their dealings because any arrangements made at that time can be subject to claw-back if bankruptcy is not avoided after all.
Due to the absence of a legal framework for consensual restructurings outside insolvency, there is necessity for a wide consensus among the parties. Any dissenters may be bound only if restructuring is conducted through one of the statutory processes.
Claims are most commonly secured by the right of pledge over a certain asset (real estate, movables, claims and other types of right). Also, the establishment of “fiduciary ownership” is quite common in relation to real estate. Fiduciary ownership entails a transfer of ownership of immovable property to the creditor, who remains the owner until the claim is settled. These security rights must be registered with the competent registries in order to produce effects towards third parties.
Outside a statutory process, a creditor may seek to enforce a security instrument if it is structured as an enforceable deed (this is mostly the case with larger claims and claims of financial creditors). Otherwise, litigation is required before a security becomes enforceable.
Once the bankruptcy has opened, secured creditors cannot initiate any new enforcement proceedings. Any proceedings that were already initiated before the commencement of bankruptcy proceedings are continued exclusively by the bankruptcy court, unless the enforcement court has already rendered a decision on the settlement of the secured creditor in such proceedings.
Additionally, any involuntary proprietary security acquired within 60 days before submitting the proposal for the opening of bankruptcy proceedings will be terminated and deleted from the public registers.
Secured creditors whose rights were duly registered before the initiation of the proceedings will have priority in the process of the settlement of their claims out of the value of the asset which is the object of security, independently of the other bankruptcy creditors.
Claims are classified and settled in the following general order of priority:
Secured creditors generally have priority over unsecured creditors in settling their claims out of the value of the security. Creditors holding claims of a higher priority are settled before creditors of a lower priority.
Unsecured creditors should submit their claims to the bankruptcy proceedings and expect pro-rata distribution of funds achieved during the course of the bankruptcy, based on their repayment rank.
After bankruptcy is opened, no formal actions for the purpose of collection or obtaining security are allowed outside those bankruptcy proceedings.
Before a bankruptcy is opened, unsecured creditors can initiate enforcement proceedings according to the provisions of the Enforcement Act. A court is also authorised to issue a decision granting proprietary security to an unsecured creditor before a final and enforceable judgment is obtained, if certain prerequisites are met. To achieve such security, a creditor should obtain at least a non-final judgment or payment order against the debtor, and should show that, without the requested decision, any collection would probably be unsuccessful or severely hindered.
After the opening of bankruptcy, unsecured creditors can, by participating in the creditors’ assembly, decide to delay sale of the debtor’s assets and to allow the debtor’s business operations to continue.
Pre-judgment temporary injunctions can be issued by a court, limiting the debtor’s disposal of certain assets until a final decision is made in a litigation. To obtain this, the creditor must demonstrate that there is a danger that the debtor will prevent or severely hinder collection of the claim by the time the litigation reaches finality.
Claims which arose following formal initiation of an insolvency procedure, such as any new loan, will have priority over pre-petition claims as they will have to be satisfied in due course and they will not be included in settlement ranks which comprise only “old claims”.
In bankruptcy, there is a statutory “waterfall” of claims – first, the costs of bankruptcy proceedings (ie post-petition claims), claims of employees and former employees and employment-related contributions incurred until the opening of the bankruptcy proceedings are covered. After these claims, other claims towards the debtor are satisfied, other than those which are explicitly designated to be of low priority (such as interests, penalties, procedural expenses incurred by creditors). It is safe to say that, in a bankruptcy scenario, claims that hold a low repayment priority are never satisfied.
Generally, no other claim has priority over secured creditor claims in a bankruptcy when it comes to the secured asset. However, importantly, a portion of any purchase price will be reserved for the bankruptcy estate, as a form of mandatory participation of a secured creditor in the overall cost of the process. This participation usually amounts to up to 10% of the achieved price; however, it can sometimes also be set at an even higher level.
A debtor-initiated restructuring plan is available in pre-bankruptcy and extraordinary administration proceedings. In bankruptcy, a restructuring plan (formally called the bankruptcy plan) is typically drawn up by the bankruptcy administrator. In any case, a restructuring plan or a bankruptcy plan should observe the principle of equal treatment of creditors that have equal legal position in the procedure. The restructuring plan can introduce a wide variety of measures, such as debt-to-equity swaps, debt write-offs and rescheduling, and transfers of assets to new entities. Any such plan is generally limited by the requirement that no participant should be placed in a worse position than it would be in if the plan were not put in place.
In all types of insolvency proceedings (pre-bankruptcy, bankruptcy and extraordinary administration), some degree of a standstill is prescribed in relation to all litigation, enforcement and/or collection proceedings against the debtor and its affiliated companies. All types of proceedings envisage an option to continue the debtor’s business throughout the process.
In pre-bankruptcy proceedings, management retains its representation and management authorities only to the extent required for the conducting of the regular course of business. For any action outside the regular course of business, management must obtain the approval of a court-appointed trustee.
In bankruptcy, management of the debtor is assumed by a court-appointed bankruptcy administrator.
Within extraordinary administration, the management regime combines the rules of bankruptcy and pre-bankruptcy: a court-appointed extraordinary administrator assumes management and representation of the debtor, while the earlier management board members of the debtor’s affiliates retain their position, now with the obligation to seek consent from the extraordinary administrator for any action which falls outside the regular course of business.
In bankruptcy, creditors are represented through a creditors’ assembly and creditors’ committee; in extraordinary administration, creditors are represented through a creditors’ council. The creditors’ assembly includes all creditors participating in the bankruptcy. Creditors’ committees and creditors’ councils consist of representatives of different groups of creditors, so that every group with a distinct legal position is represented.
The most important powers granted to these bodies comprise participation in drafting the restructuring plan and granting consents for certain extraordinary dealings of the debtor.
Due to the majority thresholds which are prescribed for voting on restructuring plans, minority creditors can be crammed down and their claims can be restructured without their consent, if the qualified majority of creditors approved the restructuring plan. However, dissenting minorities have at their disposal certain legal remedies designed for protection of the minority against breaches of the equal treatment principle by the majority.
Creditors are allowed to transfer their applied claims to a third party during the process. By virtue of such a transfer, the transferee becomes a creditor in the proceedings and assumes the legal position of the transferor, based on a notarised document or a statement given by the transferor before the court.
Only extraordinary administration proceedings can be applied for reorganisation of a corporate group through a single restructuring plan. Restructuring plans in pre-bankruptcy and bankruptcy are applied on a single-debtor basis; however, several different plans may be intertwined so that several debtors are simultaneously restructured.
Sales of assets during the process are possible, but there is an approval process in place involving the creditors or court-appointed officers. For sales of significant assets in bankruptcy, the bankruptcy administrator is obliged to obtain an approval from the creditors’ committee. In pre-bankruptcy, the pre-bankruptcy trustee is authorised to grant such an approval. During extraordinary administration proceedings, the extraordinary administrator needs to obtain the approval of the creditors’ council for disposals that exceed prescribed thresholds.
During a restructuring process, normally the assets that are required for the realisation of the restructuring plan are not sold. Non-core assets may be sold if the required approvals are granted, as mentioned previously.
If a sale is conducted in the process leading up to the restructuring plan, any security over the asset being sold is released only if the secured creditor will receive the funds arising from the sale.
During pre-bankruptcy, new financing can be obtained if more than two thirds of creditors provide their approval. If pre-bankruptcy fails and bankruptcy is opened, such financing will have a super-senior status.
In bankruptcy, the bankruptcy administrator can obtain a loan, which will be treated as a cost of the bankruptcy estate and will have priority in relation to pre-petition claims. For any significant financing, approval of the creditors’ committee is required.
During extraordinary administration, the extraordinary administrator may, with the prior consent of the creditors’ council, assume new borrowings on behalf of and for the debtor’s account for reduction of systemic risk, business continuance, safeguarding of assets, and payments which arise out of “operative business”. Such claims will have priority over other creditors’ claims (except for current and former employees’ claims), and super-senior status if the proceedings turn into bankruptcy.
A restructuring plan will typically involve a complete or partial write-off of certain claims, to the degree to which they will not be able to be satisfied under the plan.
In all types of insolvency procedures, if and when a settlement (as part of a restructuring plan) is adopted by the creditors, the court should issue a formal decision whereby such a settlement is confirmed, in order for the settlement to become an enforceable deed. The court does have the authority to refuse to confirm the settlement, in cases of material breaches in the procedure leading up to the adoption of the plan, and this includes the requirement of equal treatment of creditors. Also, the court is obliged to establish whether the plan puts any creditor in a worse position compared to if the plan were not put in place.
A restructuring plan can have a very broad scope of application, which may also introduce changes in the debtor’s contractual relations.
Upon opening of bankruptcy, the bankruptcy administrator can choose to reject certain agreements following opening of bankruptcy (ie in the process leading up to the structuring of the plan), so that the plan is made free of undesired agreements.
Rights of set-off or netting are typically exercised following opening of bankruptcy, with legal effects as of the day on which the bankruptcy was opened.
Set-off is prohibited in the following circumstances:
A court decision on adoption of a restructuring plan has the legal effects of an enforceable deed, which means that any creditor can initiate enforcement against the debtor on the basis of the restructuring plan. In bankruptcy, a significant default of the debtor with regard to payment of a claim which was rescheduled or reduced in the plan may lead to reinstatement of the claim to its previous maturity and amount.
A restructuring plan could envisage retention of ownership over the debtor. However, in practice this happens only in pre-bankruptcies because in those proceedings restructuring plans are drafted by the pre-petition management, which obviously has ties with the debtor’s owners. In bankruptcy and extraordinary administration, newly appointed officers structure the plan and retention of incumbent shareholders is rarer. In any case, since the creditors and not shareholders are voting on any plan, even in those pre-bankruptcies where earlier shareholders retain a share in the debtor, they are usually heavily diluted.
Very few entities qualify as companies of strategic importance and thus be subject to extraordinary administration.
Therefore, statutory insolvency and liquidation proceedings available to most entities in Croatia consist of (voluntary) pre-bankruptcy, (involuntary) bankruptcy, and liquidation (mandatory when a solvent company ceases its operations). All these proceedings are opened and supervised by the competent court.
Pre-bankruptcy proceedings are aimed at restructuring the debtor’s business and prevention of insolvency, and not at the sale of assets for the purpose of satisfaction of creditors. The procedure should not last for more than 120 days. However, if it is probable that the pre-bankruptcy proceedings will be successfully concluded, the court may extend the procedure for an additional 180 days, at the most. Upon opening of pre-bankruptcy, creditors are obliged to apply their claims within the deadline determined in the decision on the opening of the proceedings, and the debtor can only make payments of subsequent claims related to the ordinary course of business.
The proceedings can be initiated only by the debtor, if the debtor is considered imminently insolvent, but before insolvency. Bankruptcy becomes mandatory when a company becomes insolvent. The application for the opening of pre-bankruptcy proceedings must be submitted by using the prescribed form, which contains data needed for identification of the debtor and a list of debtor’s assets and liabilities. Before or during the pre-bankruptcy proceedings, the debtor must also prepare a restructuring plan, which will be put to the creditors’ vote at the end of the process.
During pre-bankruptcy, there is a stay on litigation and arbitration proceedings, as well as enforcement proceedings and proceedings aimed at securing the creditor’s claims, to the extent such claims are affected by pre-bankruptcy (primarily, this is applicable to proceedings against the debtor in relation to claims which arose prior to opening of pre-bankruptcy). Also, new proceedings regarding claims that are affected by pre-bankruptcy cannot be initiated during the pre-bankruptcy proceedings. Ongoing litigation and arbitration proceedings will be suspended or continued following the confirmation of the restructuring plan (depending on whether the claim of the creditor is included in the confirmed restructuring plan or not). The same applies to enforcement proceedings and proceedings aimed at securing the creditors’ claims. However, unlike litigation and arbitration proceedings, these proceedings may be continued earlier (ie during the pre-bankruptcy proceedings) if the pre-bankruptcy proceedings are not concluded within the deadlines prescribed by law.
During pre-bankruptcy, the debtor continues business operations under the supervision of the pre-bankruptcy trustee and the court. General civil law mostly applies with regard to the debtor’s contractual obligations. However, the law limits some important rights of the creditors that entered into material contracts with the debtor, which were not fully fulfilled prior to the opening of the pre-bankruptcy proceedings by both the creditor and the debtor. To enable the successful conclusion of the pre-bankruptcy proceedings, such creditors are not allowed to withhold the fulfilment of their obligations, terminate the contract, accelerate their claim or change the contract in a way that would be detrimental to the debtor.
If the prescribed majority of creditors supports the restructuring plan, the process ends with court’s confirmation of the plan, otherwise the case turns into a bankruptcy.
Bankruptcy proceedings can be initiated by the debtor, a creditor (regardless of the debtor’s consent) and by the Financial Agency. During bankruptcy, the debtor’s assets are sold in order to satisfy claims submitted by the creditors, unless the creditors decide to continue the debtor’s business and try to agree on a restructuring plan.
Claims become due and payable on the day bankruptcy is opened. Similar to the pre-bankruptcy regime, during bankruptcy there is a prohibition of initiation of litigation and enforcement proceedings, as well as proceedings aimed at securing the creditor’s claims that arose prior to the opening of bankruptcy proceedings, whereas all ongoing proceedings shall be suspended.
In bankruptcy, representation and management of the debtor are transferred to a bankruptcy administrator, who is obliged to manage the debtor in a way which preserves and protects the bankruptcy estate.
In bankruptcy proceedings, the bankruptcy administrator is entitled to “cherry pick” among unfulfilled agreements and decide which not to continue. Pre-petition legal actions of the debtor are scrutinised by the bankruptcy administrator and creditors, and can be contested if they undermine the satisfaction of the creditors, or put certain creditors in a favourable position.
If creditors had the right of set-off at the time of the initiation of bankruptcy, they shall be allowed to exercise this right and the initiation of the bankruptcy proceedings shall have no effect on the creditor’s right. However, should the claims on which the set-off is based be conditional or not yet due at the moment of initiation of the bankruptcy proceedings, the set-off may be conducted only at the moment when the required conditions are met.
Bankruptcy is closed when all the value of the bankruptcy estate is distributed, or, if a restructuring plan is adopted by the required majority of creditors, when the decision on confirmation of the restructuring plan becomes final.
Liquidation is commenced with a shareholders’ resolution on termination of the company, which is registered with the court registry. The appointed liquidators shall give notice to the company’s creditors to file their claims. For most types of companies, creditors should file their claims with the company within six months of the publication of the notice. The company must directly inform all of the known creditors.
Assets of the company that remain after fulfilment of all liabilities shall be distributed to the shareholders in proportion to their shares in the company’s capital, unless other criteria are established in the corporate documents of the company. If, at any given moment, the liquidators establish that the company’s assets do not suffice to settle all the creditors’ claims, they shall immediately suspend the liquidation and propose initiation of bankruptcy proceedings.
Specific rules on the sale of debtors’ assets are prescribed for bankruptcy, as pre-bankruptcy and extraordinary administration are intended primarily for achieving a restructuring plan in which the debtor should continue to operate.
The sale process is conducted by the bankruptcy administrator, with supervision of the court. Sales of certain significant assets, such as an enterprise or a share in some other company, must be approved by the creditors’ committee. The creditors’ assembly is authorised to define the sale process for all assets other than real estate, vessels and aircraft which are encumbered with proprietary security. In this kind of decision the creditors can also set up a stalking horse bidding system, or even decide to effectuate pre-negotiated sales transactions.
In the absence of any specific decision of the creditors’ assembly regarding disposal of assets, as well as in all cases of sale of encumbered real estate, vessels and aircraft, sale is conducted pursuant to the rules which regulate enforcement, which typically means that assets are sold at public auctions. In the event of an unsuccessful auction, the starting price decreases at each subsequent auction.
Credit bidding is allowed; however, the secured creditor with a first ranked pledge over a real estate can only bid at the price equal to the estimated value of the real estate. The purpose of this rule is to prevent secured creditors from bidding at very low amounts and thus preserving the remaining part of their claims. Also, even in case of a credit bid, the bidder must pay the amount required to cover procedural costs which have priority to the settlement of his secured claim.
In bankruptcy, assets are predominantly sold individually, and they are transferred to buyers “free and clear” since holders of proprietary security are satisfied out of the achieved price. Assets are released from any part of security which was not fully satisfied out of the purchase price. The creditors’ assembly and the court are also authorised to approve a sale of all the debtor’s assets as a whole. In that case all assets, with security interests, may be transferred to the buyer, unless encumbered assets are expressly carved out of the sale.
In bankruptcy, creditors participate in the process through the creditors’ assembly. A smaller representative body, a creditors’ committee, may be established by creditors or by the court. The creditors’ committee must include creditors with the highest claims and bankruptcy creditors with small claims. Representatives of former employees should also be represented in the creditors’ committee, unless the employees hold insignificant claims. The creditors’ committee is obliged to supervise the bankruptcy administrator and to review business books and documents. The creditors’ committee may authorise individual members to perform certain tasks within its scope of competence.
The members of the creditors’ committee are entitled to a reward for their work, which is rather symbolic and does not include costs of advisers; it is determined up to the amount of the average daily salary in the Republic of Croatia per day for the performance of its activities.
The decision of a foreign court on opening of bankruptcy and/or of the approval of a bankruptcy plan may be filed by a foreign bankruptcy administrator or by a creditor. The Croatian court will recognise a decision if it was reached by a foreign body that has international jurisdiction under Croatian law, if the decision is enforceable under foreign law, and if the recognition is not against the rules of Croatian public policy.
The firm is not familiar with any practice showing that courts have entered into cross-border insolvency or bankruptcy protocols with courts in other countries.
Croatian commercial courts have exclusive jurisdiction for bankruptcy proceedings over a debtor whose centre of business operation is in the territory of the Republic of Croatia. If bankruptcy proceedings are initiated against the same debtor in Croatia and in another state, bankruptcy administrators in these proceedings shall co-operate and are obliged to exchange all legally permitted information that may be of importance for the proceedings.
Croatian bankruptcy law is harmonised with EU legal sources and generally follows the principles set forth in the UNCITRAL Model Law on Cross-Border Insolvency.
Foreign and domestic creditors are in principle treated equally; foreign creditors will have to register with the Croatian tax authorities to obtain an identification number which is already available to domestic creditors.
Procedure for enforcing a judgment from a foreign country is governed by the Croatian Private International Law Act, international treaties and a number of EU regulations (predominantly Regulation 1215/2012).
EU regulations apply if the judgment is issued in EU member states, while the judgments issued in non-EU member states are recognised and enforced in accordance with international treaties and the Croatian Private International Law Act.
The reasons for refusal of recognition and/or enforcement of a foreign judgment listed in Regulation 1215/2012 and the Croatian Private International Law Act are very similar.
In principle, Croatian courts will refuse to recognise and/or enforce a foreign judgment in the following cases:
In pre-bankruptcy proceedings a pre-bankruptcy trustee is appointed.
In bankruptcy proceedings or extraordinary administration a bankruptcy administrator or extraordinary administrator is appointed, respectively.
Liquidation is conducted by a liquidator.
A pre-bankruptcy trustee examines the business operations of the debtor, prepares a list of all assets and liabilities of the debtor, examines submitted claims, and has the authority to dispute claims. While management of the debtor remains in place, the pre-bankruptcy trustee oversees the business operations of the debtor. Rights and the liability of the pre-bankruptcy trustee is examined, mutatis mutandis, according to the rules of bankruptcy law regarding rights and the liability of the bankruptcy administrator.
A bankruptcy administrator assumes control of the business of the debtor and its assets, and represents the debtor towards third parties. It is the duty of the bankruptcy administrator to review and either accept or challenge all claims submitted by creditors at the start of the process, to prepare an initial list of debtor’s assets, and/or to conduct sale of the debtor’s assets and/or to submit a restructuring plan.
The bankruptcy trustee is liable for any damages caused to participants of the proceedings (primarily, the creditors) as a result of breach of his duties. If damage was caused by an action conducted as based on an approval or an instruction of the bankruptcy court, the bankruptcy administrator will be exonerated unless the approval or instruction was obtained by fraudulent means.
An extraordinary administrator represents the debtor independently and individually, and manages the debtor’s day-to-day operations. His duties and responsibilities correspond to those of the bankruptcy administrator in bankruptcy.
A pre-bankruptcy trustee or bankruptcy administrator is appointed by a court’s decision through the method of random selection, from the list of bankruptcy administrators managed by the Ministry of Justice.
In bankruptcy the creditors’ assembly may appoint another bankruptcy administrator, by a majority of claims of creditors who participated in the vote.
Liquidation is carried out by all company members as liquidators, unless a decision of the members decides or the articles of association stipulate that certain company members or other persons should be appointed as liquidators.
In relation to the company, the directors have to conduct business with the diligence of a prudent businessman. Failure to do so may trigger damages liability. Directors can also be held liable under civil and criminal law for a delayed filing for bankruptcy, with prescribed penalties of a monetary fine or imprisonment for up to two years.
Pursuant to general rules of corporate law, the management has certain obligations if there is a loss in the company or if the company is unable to pay its debts or is overindebted, as follows:
Although creditors are entitled to claim for compensation of damages outside bankruptcy, they do so on behalf of the company. In bankruptcy, a damages claim against a director must be asserted by the bankruptcy administrator, in order not to put any creditor in a privileged position.
Certain transactions of the bankruptcy debtor effected within a particular statutory period before the filing for bankruptcy are, or may be, deemed ineffective in relation to the bankruptcy estate, if they disrupt regular satisfaction of creditors or if they grant certain creditors a privileged position.
There are several “suspect periods” covering transactions that can be challenged or set aside preceding the bankruptcy declaration. These periods may vary from 30 days to ten years. As a general rule, for contesting transactions which are further back in time, a more onerous burden of proof is set for the claimant in terms of bad faith of the debtor and the other transaction party.
The bankruptcy administrator or bankruptcy creditors may invalidate any transaction made prior to opening of bankruptcy which adversely affects the position of the other creditors.
Such claims may be initiated within two years following the opening of the bankruptcy proceedings. A final judgment rendered in such claw-back litigations will have effect and directly apply to the bankruptcy debtor (ie, the bankruptcy estate) and all bankruptcy creditors. The result of a successful claw-back litigation is that the defendant (ie, other transaction party of the debtor) shall return to the bankruptcy estate all benefits acquired on the basis of the annulled transaction.
Insolvency in Croatia in Numbers – Return to Pre-COVID-19 Trends
In 2020, a legislative intervention essentially prohibited creditors from initiating bankruptcy proceedings over their debtors in the period from 1 May 2020 until 18 October 2020. Naturally, as visible from Annual Reports on the State of the Croatian Judiciary (jointly: the “Reports”; individually: the “Report”), which are submitted every year by the President of the Supreme Court of the Republic of Croatia to the Croatian Parliament, this kind of legislative intervention produced a significant decline in the number of insolvency (in Croatia, pre-bankruptcy and bankruptcy) court cases during 2020. Naturally, after the “insolvency holiday” ended, the Report for 2021 shows that there was a significant increase in new insolvency cases initiated before the Croatian courts, in relation to 2020.
The latest data for 2022 shows a stabilisation of these trends. According to the data published by the Croatian Bureau of Statistics, the number of opened bankruptcy proceedings during the first three quarters of 2022 is once again similar to the pre-pandemic years (2018 and 2019).
Obviously, these are only rough statistics and do not paint the full picture. However, they do appear to show that the effects of the COVID-19 pandemic on the dynamic of initiation of formal insolvency cases are subsiding.
Changes in the Legal Framework – Adjustments, but Not a Major Reform
Insolvency proceedings in Croatia are primarily regulated by the Bankruptcy Act (OG No 71/15, 104/17, 36/22, the “Bankruptcy Act”). In March 2022, the Croatian Parliament enacted the latest changes to the Bankruptcy Act, which was originally enacted in 2015.
The primary goal of these changes, which for the most part entered into force on 31 March 2022 (with the exception of certain provisions which entered into force on 1 October 2022), was to implement into the Croatian legal system the Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency) (the “Directive”).
Some changes were designed to increase the chances of successful recovery of the debtors and to reduce the frequency of the most common type of bankruptcy cases in Croatia, which result in termination of debtor’s business, sale of all assets and recovery by creditors from the proceeds of such sale. From this perspective, the changes made to pre-bankruptcy proceedings seem particularly relevant, since pre-bankruptcy proceedings are conducted in order to restructure a debtor’s business and debts before formal bankruptcy reasons appear.
Changes to the Pre-bankruptcy Regime – Easier Process, but With a Much Stronger Time Constraint
The most notable changes recently made to pre-bankruptcy proceedings, which should help facilitate successful adoption of a restructuring plan, are, for example, as follows.
Any contract clause or action of the parties that would be contrary to this rule will not produce legal effects. This limitation on what creditors can agree with their debtors will provide additional manoeuvring space for the debtors (although it may cause creditors to take particular care when drafting agreements, especially when they relate to long-term co-operation with the other party).
The additional prerequisites for admissibility of an appeal against a restructuring plan will obviously reduce the circle of creditors eligible to appeal, which will ultimately work in favour of debtors and increase chances for a restructuring plan to be confirmed by the courts.
On the other hand, the new legislation introduced an important new constraint on the pace at which pre-bankruptcy proceedings must be conducted. While there were always rules on the maximum duration of pre-bankruptcy proceedings, no consequences for breaching the rules were imposed in practice, which allowed pre-bankruptcies to continue for longer than the period prescribed by law.
This should no longer happen. The latest legislative changes introduced an important rule which will practically hinder prolongation of the process beyond the prescribed periods. This new rule prescribes that any enforcement proceedings related to pre-petition claims are stayed for only a limited time period of 120 days, which can be prolonged by a specific court decision for an additional maximum of 180 days. Upon expiry of these time periods, enforcement of pre-petition claims will continue automatically, and new enforcement proceedings can be initiated.
This rule creates a situation in which the debtor will have to complete the pre-bankruptcy proceedings in no more than 300 days (otherwise, enforcements continue which will effectively disable restructuring in most cases). This may prove to be very difficult in practice. Namely, pre-bankruptcy proceedings comprise several distinct formal stages (such as application of claims, examination of claims, drafting and negotiating the restructuring plan, voting on the plan etc), some of which require special court hearings to be scheduled followed by court decisions which may be appealed (and potentially reversed if an appeal is accepted by the second-instance court).
To go through all these stages successfully within 300 days will likely prove challenging for the debtor, but also for the courts handling pre-bankruptcy cases. This limitation may reduce the number of successful restructurings through pre-bankruptcy, regardless of the various other debtor-friendly novelties introduced by the new amendments to the Bankruptcy Act, as mentioned earlier.
Amendments to the Claw-Back Regime in Bankruptcy – Less Incentivising for Individual Creditors
Amendments made to the Bankruptcy Act in 2022 also introduced several important changes to the rules governing bankruptcy proceedings. From the perspective of practitioners acting for creditors, the changes to the claw-back regime seem to be of particular interest.
The previous claw-back regime can be simplified as two basic rules.
At first glance, this regime ticked all the boxes. On the one hand, it provided an advantage to the bankruptcy trustee, a professional acting for the benefit of all creditors, when deciding whether to initiate a claw-back litigation at the risk and for the benefit of the bankruptcy estate, ie, all the creditors. On the other hand, it offered a reserve option to each creditor to initiate a claw-back litigation if the bankruptcy trustee fails to do so. Such creditors acted at their own risk in terms of the costs of claw-back litigation, but also with the upside of priority satisfaction in case of success.
However, this regime was criticised by some practitioners for creating the wrong kind of incentives for creditors. Critics claimed that any creditor with evidence of suspicious pre-petition transactions was incentivised to withhold such evidence from the bankruptcy trustee and other creditors in order to be in the best position to initiate and win a claw-back litigation in order to secure priority in satisfaction of their claim from the proceeds.
The new claw-back regime can be simplified as the following basic rules.
The new regime does tackle the described “problem of wrongful incentives” of creditors aiming to initiate the claw-back litigations, criticised by some practitioners. However, at the same time, it takes away the incentive for individual creditors to take the risks of conducting the litigation (which includes financing their own litigation costs, and liability to reimburse the litigation costs of the other party if they lose the litigation), if the proceeds of a successful claw-back will be shared among all creditors.
As a result, the initiation of claw-back action will, from now on, likely depend mostly on the initiative of the bankruptcy trustees. In turn, the bankruptcy trustees will likely base their decision on whether the bankruptcy estate has enough funds to finance several years of such litigation. Bankruptcy trustees may also seek creditors to finance the related procedural costs; however, individual creditors will here, too, lack the incentive to finance such costs only to have them reimbursed in case of success, without additional upside.
This situation could potentially be resolved by development of third-party financing practices, whereby a third party would enter into an arrangement to finance a bankruptcy trustee’s claw-back action, but under the condition that such third party reimburses its costs of such litigation but also receives some proportion of the benefits in case of success.
Such arrangements are currently highly uncommon in Croatia and therefore untested in practice. Any arrangement of this kind could potentially be interpreted as hindering the legally prescribed satisfaction waterfall, by favouring the third-party financier to the detriment of other creditors. In any case, it remains to be seen whether the new claw-back regime will facilitate development of such schemes in the future.
A View on Further Developments
The latest changes to the Bankruptcy Act should increase the number of successfully conducted restructurings through pre-bankruptcy proceedings. However, the main precondition to achieving this goal will most likely be the willingness of all stakeholders to accelerate their tempo to the extent needed for the pre-bankruptcy cases to be resolved within 300 days. This may prove to be a challenge in many cases.
The COVID-19 pandemic is no longer as much of a topic when macroeconomic environment is discussed. However, this is not because it became completely irrelevant, but rather because other issues, such as inflation and the related rise of interest rates, came more into the focus of observers. While Croatia has positive things to look forward to, such as joining both the eurozone and the Schengen zone in 2023, there is reason to expect a lively development of insolvency and restructuring practice, both through court procedures and out-of-court processes.